For a Small or Medium enterprise, Working capital is like Blood for sustaining life. You need to make sure the right amount of Working Capital Funds are available at the appropriate time. Get it too early and you end up paying more interest. Get it late, and your production schedules and other operational phases suffer. Therefore it is necessary that the Working Capital requirements of the Project should be projected fairly accurately, at the stage of Planning and thereafter, on annual basis. The skill can be easily learned, with a little determination and concentration.
Running to Banks when the actual need arises is indicative of poor planning. Prudent planning must include (a) A well worked out Cash Flow statement, showing absolutely realistic projections of revenues expected to be generated over the initial three years of the Project is your best guarantee that Banks will be inclined to lend you the required amount of working capital and also to give firm commitment to release the agreed amount as per schedule indicated by you.
The working capital requirements should be worked out as close as possible to the actual need and funding arranged right at the beginning of the Project. Term loans and Equipment Leasing are covered under the Long term financial need. The money required for carrying on the actual operations on day to day basis is to be covered under Working Capital. Normally, it is seen that entrepreneurs tie up all their available resources in obtaining the Term Funds and equipment. This is a recipe for disaster, in the sense that real problems arise with Working capital needs. It is therefore necessary that the entrepreneur should hold in reserve that part of his resources which he can mobilize as quickly as possible, to meet any crisis on the Working Capital front.
The main areas of operation which call for Working Capital are:
- Recurring expenses, such as salaries, wages, Rents, Rates and Taxes,
- Cost of Raw material to be procured, when inventory from previous production cycle are piled up and it is not expected to be liquidated at short notice
- Manufacturing costs, excluding wages
- Other unforeseen expenses
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